Wells Fargo Creates SWAT Team to Keep Loans In-House: Mortgages

Wells Fargo added $14.5 billion in nonconforming mortgages in the six months ended September, bringing the total held by the bank to $72.4 billion, according to a bank presentation. Photographer Ron Antonelli/Bloomberg

Jan. 8 (Bloomberg) -- Wells Fargo & Co., the largest U.S.
home lender, has assigned about 400 underwriters to originate
mortgages for the bank to hold, with as many as 40 percent of
those loans likely to fall outside government guidelines taking
effect this week.

The bank is training the group as a way to increase lending
without losing control of quality, according to Brad Blackwell,
head of portfolio lending for the San Francisco-based lender.
The group will review loans including those with terms that
prevent them from qualifying for protections provided by the
Consumer Financial Protection Bureau, or CFPB, under new rules,
he said.

Wells Fargo, responsible for about one in five U.S.
mortgages last year, is pushing the initiative to compete for
clients seeking non-conventional loans such as those with
interest-only payments. That segment will be increasingly
sought-after at a time when rising interest rates are curbing
borrowing demand and banks are facing the biggest regulatory
overhaul since the Great Depression.

“As rates continue to rise and refinancing volume
continues to contract, lenders are going to be looking for a way
to keep their staffs busy,” said Erin Lantz, director of
mortgages at Zillow Inc.

Congress directed the CFPB, formed as part of the 2010
Dodd-Frank Act, to create the qualified mortgage rule after
banks were blamed for helping spark the 2008 credit crisis by
giving mortgages to people who couldn’t afford them. The
regulations provide a measure of legal protection to banks that
meet guidelines and expose them to legal liabilities if the
loans charge high fees or require total debt payments exceeding
43 percent of the borrower’s income.

‘Sweeping Re-Regulation’

“What you see happening on Jan. 10 is the most sweeping
re-regulation of mortgage finance that I’ve seen,” said Pete
Mills, senior vice president of residential policy at the
Mortgage Bankers Association, whose home loan career started in
1983.

Unlike the loose lending practices of the last decade, most
lenders now approve borrowers only after fully documenting their
incomes and assets. At a time when government-backed loans
account for 90 percent of the market, non-qualified mortgages
can’t be insured by the Federal Housing Administration or sold
to Fannie Mae or Freddie Mac, the government-controlled
enterprises that package home loans into bonds.

Changing Structure

Wells Fargo wants to give its clients more loans that can’t
be sold to the government-backed firms. The bank is confident
the new underwriting group, which will make both qualified and
non-qualified mortgages, will allow it to originate debt that
doesn’t meet the CFPB’s safe harbor, said Blackwell. Non-qualified mortgages could be between 25 percent to 40 percent of
the bank’s total nonconforming loans, or about 5 percent of all
mortgages, he said. Nonconforming loans are those that can’t be
sold to Fannie Mae or Freddie Mac.

The approach represents a change for the bank, which long
made loans with the intention of selling them all.

“In the early days of our history, we were a mortgage
bank: our primary responsibility was to originate and sell,”
Blackwell said. “Today we are originating for our portfolio.
These are loans that we will hold for their lifetime.”

Wells Fargo added $14.5 billion in nonconforming mortgages
in the six months ended September, bringing the total held by
the bank to $72.4 billion, according to a bank presentation.

Mortgage Opportunity

Bank of the West, a subsidiary of BNP Paribas SA, also
plans to offer non-qualified mortgages to its clients regardless
of amount, according to Stew Larsen, executive vice president of
the mortgage banking division based in Omaha, Nebraska. The
rules are an opportunity for banks that have capacity to hold
loans on their balance sheets to take market share from mortgage
companies that lack that capability, he said.

Non-qualified mortgages have the potential to be a $400
billion a year market, starting with the most creditworthy
borrowers and broadening as home values and the wider economy
improve, according to Raj Date, who stepped down as deputy
director of the CFPB a year ago to found Fenway Summer LLC,
which plans to offer non-conforming loans in 2014.

Lenders are responding to mortgage volumes that are
forecast to plunge 33 percent this year to $1.17 trillion from
2013, according to the Mortgage Bankers Association. Rates on
30-year mortgages averaged 4.53 percent last week, up from 3.35
percent in early May, according to Freddie Mac.

The rate increased when the Federal Reserve signaled plans
to reduce $85 billion in monthly bond purchases and already has
diminished the refinancing that accounted for two-thirds all
home loans in the last two years.

Refinancing Declines

Declines in refinancing have led the largest lenders to
start cutting jobs. JPMorgan Chase & Co. said it may dismiss
15,000 employees, Wells Fargo cut more than 6,200 positions and
Bank of America Corp. eliminated at least 3,400 mortgage-related
workers. Citigroup Inc. also said it’s looking to trim staff.

Banks are being cautious about testing the limits of the
new rules as they continue settling disputes arising from the
last decade’s lending spree.

JPMorgan, which agreed to pay $5.1 billion in October to
resolve claims by Fannie Mae and Freddie Mac about debt sold to
the financing companies, has no plans to expand or discontinue
products after Jan. 10, including non-qualified mortgages for
borrowers with a high-net worth, according to Amy Bonitatibus, a
spokeswoman for the New York-based bank.

Bank of America will continue providing interest-only loans
to “preferred customers in a very conservative manner,”
according to bank spokesman Terry Francisco.

Citigroup Offering

Citigroup will offer some loans such as adjustable-rate
mortgages and those too large to qualify for agency guidelines,
according to Mark Rodgers, a bank spokesman. The loans will only
be made when they are “appropriate and suitable” for
borrowers, he said.

The new rules will help protect consumers and reduce the
risk that the economy will crash again because of shoddy
lending, Senator Elizabeth Warren, a Democrat of Massachussetts,
said yesterday.

“The rules will reshape the mortgage market for the
better,” Warren, who first proposed creating the CFPB, said
during a floor speech. “They will give people a better chance
to buy homes and a better chance to keep those homes, and they
will force mortgage lenders and servicers to compete by offering
better rates and customer service, not by tricking and trapping
people. ”

Initial Reluctance

While lenders initially will be reluctant to extend non-qualified mortgages to borrowers with lower incomes, limited
assets or low credit scores, they will probably stretch the
rules as they seek to expand business, just as they began
offering loans to subprime borrowers in the last decade,
according to Richard Eckert, an MLV & Co. analyst who worked as
a risk management analyst at the Federal Home Loan Bank of San
Francisco in the 1990s.

“Just like back in the early 2000s, to keep the party
rolling they slipped into subprime,” he said. “People that
were high and mighty and were going to take the high road a year
ago when quarterly loan originations were $400 billion and now
seeing those dry up to as little as $150 billion, I think they
are taking a real hard look at what they may have passed up.”

Even as it cuts mortgage jobs, Wells Fargo has selected
between 300 and 400 underwriters who will execute different
policies and report to separate bosses than peers who check over
loans the bank sells to investors, Blackwell said in a telephone
interview.

Separate Groups

“We have separated the underwriting group into a separate
team that only underwrites loans” for the bank’s own balance
sheet, he said. “We found it impossible to achieve our
objectives” with the two groups together, he said.

The underwriters will be located in six locations around
the country and the training of the group and policy writing
will be completed by the end of the year, Blackwell said. Tim
Disbrow, head of west-coast underwriting and fulfillment, will
oversee the effort.

This may lead to faster closing times and fewer mistakes,
according to Joseph Morford, an RBC Capital Markets analyst
based in San Francisco. That should build trust with the
company’s financial advisers and private bankers, who are
expected to refer wealthy customers, he wrote in a Dec. 23 note
to clients.

“The brokers should feel more comfortable that their
customers will be handled appropriately, which over time should
lead to more mortgage referrals,” Morford wrote after meeting
with David Carroll, head of Wells Fargo’s wealth and retirement
unit.

Already, the new policy has “allowed us to do more volume
with better service and better quality,” Blackwell said.